For-profit college accused of coercing students into costly loans

March 12, 2014

Updated March 13, 2014 11:50 a.m.

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The federal government claims that ITT Technical coerced its students into high-interest private loans by threatening to withhold their transcripts or expel them from courses. The for-profit college has denied using coercive tactics. ANA VENEGAS, STAFF PHOTOGRAPHER

The federal government claims that ITT Technical coerced its students into high-interest private loans by threatening to withhold their transcripts or expel them from courses. The for-profit college has denied using coercive tactics. ANA VENEGAS, STAFF PHOTOGRAPHER

ITT Technical Institute, the for-profit college chain, has long promoted its pricey courses as a path to a higher-paying job and a better life.

But for many of its students in Orange County and across the country, that dream became a financial trap, according to a lawsuit brought by federal regulators.

The civil complaint by the Consumer Financial Protection Bureau alleges that ITT employees illegally coerced some of its most vulnerable students into taking out high-interest private loans when their federal aid was not enough to pay its tuition.

Those employees, who were paid based in part on how many students took out the loans, threatened to withhold some students' transcripts or expel them from classes if they didn't sign papers authorizing the debt, according to the complaint.

The government also claims that the company's recruiters used “aggressive and controlling” sales tactics to fill its classrooms with students, who were charged $44,000 for a two-year degree, one of the nation's most costly career programs.

“ITT sacrificed its students' futures by saddling them with debt on which it knew they would likely default,” said the complaint, which was filed Feb. 26 in U.S. District Court in Indianapolis.

ITT executives have vowed to “vigorously contest” the lawsuit, which they said was “without merit.”

“Contrary to the Bureau's allegation, ITT Tech did not ‘coerce' its students into unfair loans, or ‘rush' them through the financial aid process,” the company said in a statement.

The ITT lawsuit was the consumer finance bureau's first to target predatory lending practices by a for-profit college, but it may not be the last. The agency is considering similar legal action against Santa Ana-based Corinthian Colleges Inc., according to disclosures the company has made to investors.

Corinthian has responded to a letter from the agency by insisting that its private loan practices do not violate the law.

ITT, headquartered in Carmel, Ind., has more than 140 campuses across the country, including a school in Orange. Corinthian operates more than 100 campuses, including the Everest College, Heald College and WyoTech chains.

Richard Cordray, the consumer bureau's director, said the ITT case “should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics.”

Federal regulators say some for-profit college companies have promoted the private loans to students to avoid a legal limit that prevents them from receiving more than 90 percent of their revenues from taxpayer-funded Pell grants and federal student loans.

In its statement, ITT said the government had used “isolated anecdotes” from the company's own mystery shopper program, which hires people to pose as potential students to ensure employees are following company policies. ITT pointed out that the government's core complaints covered just six months of loans.

“We are extremely proud of our work over the last 45 years,” ITT said, “and we intend to continue our mission of helping people improve their lives through the pursuit of high-quality, career-based education.”

Nicole Elam, a spokeswoman for ITT Educational Services Inc., the chain's parent company, said last week that she could not comment further.

For-profit career college companies like ITT and Corinthian have flourished by offering easy enrollment and convenient class times. In recent years, the companies have played an increasing role in educating Californians as community colleges – which charge a fraction of the price – have reduced classes because of state-funding shortfalls.

But the industry has faced increasing scrutiny as it has taken in a greater share of federal student aid, while spending heavily on non-educational expenses like advertising, recruiting and executive salaries. Last year, 96 percent of ITT's revenues – more than $1.2billion – came from the federal and state governments.

THE SALES PITCH

According to the lawsuit, ITT trained its recruiters to get people who inquired about its programs to visit the campus, where they would be more susceptible to a high-pressure sales pitch that could go on for hours.

When someone asked about the college's cost, the recruiters were instructed to make statements such as “I cannot tell you what your exact cost will be ... it varies student to student.” They were to add that the person would find out about the cost “when you come in for the tour.”

When a reporter visited the lobby of ITT's campus in Orange last week, there were no brochures available to describe the degree programs or their cost. An employee said the college doesn't provide brochures to visitors, but that people are told those details when they take a campus tour. She said much of that information was also available on the company's website.

The government alleges ITT misled prospective students with statistics that exaggerated how much they would earn and their chances of getting a job with a degree.

Laura Brozek worked as a top recruiter for ITT in Orange County and at two of its other Southern California campuses until 2011, when she became concerned about management's tactics. Brozek provided written testimony about her experience to the Senate Committee on Health, Education, Labor and Pensions in 2012.

In an interview with the Register, she detailed how recruiters had used a technique called “the pain funnel,” which was meant to manipulate potential students' emotions to get them to enroll.

“I would focus on people's shortcomings,” Brozek said in the interview. “We played upon the vulnerable.”

Brozek said recruiters were paid based on the number of students they enrolled.

The lawsuit alleges that ITT financial aid staff rushed students through the paperwork.

A mystery shopper that ITT hired to pose as a potential student reported

that the financial aid coordinator had discouraged her from reading what was on the computer screen, telling her it was “not necessary to read all the way through.”

A TEMPORARY CREDIT

Government lawyers said the private-loan scheme began with ITT lending money to first-year students through what it called a temporary credit.

The temporary credit was a no-interest loan that was often due at the end of the academic year. The company offered the temporary credit, the government said, because it had raised tuition so high that even many students getting the maximum amount of federal aid could not cover the bill.

The students were given little information about the credit. Some did not realize it was a loan that had to be repaid, the lawsuit said.

One mystery shopper reported that the staff had told her that any costs above those paid by federal student aid “would be covered under a new temporary credit and that I would owe no money out of pocket.”

From 2009 to 2011, ITT lent students $100 million to $150 million a year through the temporary credit.

ITT's accountants deeply discounted the loans on the company's balance sheet, calling them “doubtful accounts.” Government lawyers said ITT executives wanted to improve the company's financial statements and impress investors by reducing those “doubtful accounts.”

Executives decided to have its financial aid staff pressure those students who were continuing into their second year of ITT courses to pay off the temporary credits by taking out private loans.

Company executives told the financial aid staff to “repackage” the students into the loans. The repackaging tactics, the government said, included getting students to come into the financial aid office and sign loan papers by emailing them, calling them at home, finding them in the bookstore or library, pulling them from class or by withholding course materials, diplomas and transcripts.

The private loans came with interest rates as high as 16.25 percent, the lawsuit said, compared with rates of 3.4 to 6.8 percent on federal student loans. ITT is now projecting a default rate of 64 percent, the government said.

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